MercoPress. South Atlantic News Agency

India raises basic rate, drains liquidity and says recovery is “firmly in place”

The Reserve Bank of India

The Reserve Bank of India (RBI) has raised key interest rates by a quarter of a percentage point in an attempt to curb near double-digit inflation. The rise was the second in a month and was in line with analysts' forecasts.

The Repo rate - the rate at which the central bank lends to commercial banks - was raised to 5.25% from 5%.

The cash reserve ratio - the percentage of banks' deposits they must keep in cash - was raised to 6% in a move to drain money in the financial system. It also raised the reverse repo - the rate it pays to banks for deposits - to 3.75%.

Annual inflation has risen sharply over the last few months, from 0.5% in September to 9.9% in March, the highest in 17 months.

“Developments on the inflation front are worrisome,” RBI governor Duvvuri Subbarao said in a statement. With the recovery now firmly in place, we need to move in a calibrated manner in the direction of normalising our policy instruments”

India's economy grew at an annual rate of 8.6% in the three months to March, largely thanks to growth in manufacturing, according to official data. This marked an increase on the 6.5% growth seen in the previous quarter.

The economy for the year ending March 2010 grew by 7.4%, ahead of the RBI's January forecast of 7.2%.

Indian Finance Minister Pranab Mukherjee said after he expected the economy to grow by 8.5% in the financial year to March 2011.